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Difficulty: HardOpportunity Cost

A manufacturing firm in Ibadan operates along its Production Possibility Curve (PPC) producing two goods: garments and shoes. Currently, when producing 150150 pairs of shoes, the firm can produce 400400 units of garments. To meet increased market demand for footwear, the firm reallocates its resources to produce 250250 pairs of shoes, causing garment output to fall to 150150 units.

Calculate the opportunity cost of producing one additional pair of shoes in terms of garments foregone.

Answer: 2.5 garments

Answer

The opportunity cost of producing one additional pair of shoes is 2.52.5 garments.
Opportunity cost along a Production Possibility Curve measures the amount of one commodity that must be sacrificed to obtain an extra unit of another. Producing 100100 additional pairs of shoes requires giving up 250250 units of garments. Therefore, the opportunity cost per additional pair of shoes is 250100=2.5\frac{250}{100} = 2.5 garments.

Step-by-Step Solution

1
Find the change in the production of shoes
ΔShoes=250−150=100\Delta \text{Shoes} = 250 - 150 = 100 pairs of shoes
To determine the gain in shoe output.
2
Find the quantity of garments sacrificed
ΔGarments=400−150=250\Delta \text{Garments} = 400 - 150 = 250 units of garments
To determine the total sacrifice in garment production.
3
Divide the sacrificed garments by the additional shoes gained
\frac{250}{100} = 2.5$ garments per pair of shoes
Opportunity cost per unit of shoes is the ratio of foregone garments to gained shoes.

Key Concept

Opportunity Cost on a Production Possibility Curve (PPC)
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Topics

Opportunity Cost

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